For the millions of Americans who lost their homes in a foreclosure or short sale during the recession, things are starting to look up. In addition to receiving a piece of the $3.6 billion settlement that banks are distributing to borrowers who were wrongfully foreclosed on, some homeowners are now becoming "boomerang buyers" and re-entering the market after a foreclosure or short sale.
Neal Katz, a mortgage agent at All Western Mortgage in Las Vegas, says he fields calls from a number of people wondering how long they have to wait before qualifying for another mortgage. "The biggest hurdle is time," he says. "Time is the only thing that makes things better."
Wait times vary depending on individual circumstances such as the size of the down payment and whether the buyer's home was foreclosed or sold in a short sale. Those who've gone through foreclosure might wait three years for a Federal Housing Administration loan or seven years for a conventional loan, according to Katz. The wait time may be closer to two or three years after a short sale. In rare cases, a homeowner who sold in a short sale may be able to get a new loan right away if he or she hasn't fallen behind on mortgage payments.
Programs aimed at helping borrowers re-enter the market through second-chance mortgages are popping up throughout the country, especially in cities like Las Vegas that were hit hard by the housing bust. Buyers who've left the market for several years and meet income requirements may be eligible for first-time buyer programs as well.
Going from owning a home to renting isn't an easy transition for most people. "It's very hard on homeowners when they have to go out and ask someone to rent them a house," says Dianne Langston, a real estate broker in Solano County, Calif. "They're ready to get out of the rental situation and be a homeowner again."
Despite the ego blow, that transition time between mortgages offers a chance to save for another down payment and clean up any credit issues. Some people who've experienced foreclosure or a short sale also let other financial obligations slide out of frustration or resignation, Katz explains. Now's the time to tackle those issues. "If you have a small collection account from a credit card, settle it," Katz says. "Take care of all the other things you can to show the underwriter that you did the best you could. That way, the delinquencies are so long ago that it shouldn't have an impact on your credit score anymore."
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Still, the fact that someone may qualify for a mortgage doesn't mean they'll immediately jump back into homeownership. Historically, only 30 percent of borrowers who defaulted on their mortgage in 2001 had taken out another mortgage within 10 years, according to researchers at the Federal Reserve Bank of San Francisco. The researchers also found that borrowers who terminated their mortgages not due to a default (for instance, paying off the house or switching to a larger or smaller house) returned to the mortgage market about two-and-a-half times faster.
Heather Harmon, a Redfin agent in Sacramento, Calif., sees some buyers waiting longer than they need to before buying again because of emotional reasons. "They've had to recover psychologically from the experience as much as they've had to recover financially," she says. "You definitely see the buyers who are just mad about what happened. They blame it on circumstances, and they're afraid of it happening again. In other cases, they're really embarrassed. They feel exposed, and they've got to drag their financials back out again."
Many people are depressed or discouraged after a foreclosure or short sale, according to Langston, because a house symbolizes their hard work and oftentimes the American Dream. "They don't understand that it's not the end of the line," she says. "I always encourage people by letting them know that they can re-enter the marketplace."
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Harmon recently worked with a couple in their 60s who bought a new home with a Department of Veterans Affairs loan two years after selling their previous house in a short sale. "They weren't proud of it, but they're picking themselves up again," she says, adding that younger homeowners often have a harder time bouncing back from a short sale because of the impact on their kids and the desire to keep up with the Joneses.
While buying a house seemed nearly impossible for the couple thanks to the competitive local market and the longer closing time for a VA loan, Harmon says building a relationship with the seller and the seller's agent helped the deal close. "We strategized our offer in a way to give the seller everything we possibly could give him because we were bound by the terms of the VA," she says.
Corrected on 05/06/2013: A previous version of this story misspelled Heather Harmon’s name.